Time for a Break After Super-Charged Stock Rally?

Stocks could take a break Thursday after Wednesdays' super-charged rally gave the Dow its best New Year's gain ever.

The "fiscal cliff" resolution cleared the way for a monster rally, unleashing New Year's buying. The Dow jumped 308 points to 13,412, the most points ever on the first trading day of the year, and the S&P was up 36 points at 1462. The market had its best percentage gain since December, 2011, and the Dow had its best New Year's gain on a percentage basis since 2009.

"It's new money for the new year," said Art Cashin, director of floor operations at UBS. "It's going on globally. It's not just a flight from safety. If you look at the percentage moves, many of them are identical so to me, it's assets coming in."

"Great move. Great start to the year, but unfortunately the great 2013 New Year's rally is going to be measured in hours, not months," said BMO Private Bank CIO Jack Ablin.

Cashin said in the last hour of Wednesday trade, the market on close buy orders increased dramatically, with 70 to 75 percent to the buy side. "That put a special bid under the market. What we benefited from today is the politicians haven't run to center stage. If they do that, things could change. This is a pretty hefty move. I would look for more consolidation tomorrow."

Late Tuesday, the House adopted the plan Senators endorsed in the wee hours of New Year's Day. It left Bush-era tax breaks in place for 99 percent of taxpayers; reversed a two percent payroll tax break for all taxpayers, and stopped the expansion of the alternative minimum tax. It failed however to tackle spending issues, leading to expectations of a contentious battle when Congress attempts to address the debt ceiling limit in the next several months.

Deutsche Bank chief U.S. economist Joseph LaVorgna said he expects the plan to take about 1 percent off of GDP, with about three-quarters of that due to the hike in payroll taxes. The Congressional Budget Office has said the full brunt of what was called the fiscal cliff – or $600 billion in tax hikes and spending cuts – would have pushed the economy into recession.

Traders aren't expecting a repeat of Wednesday's market performance, and stock futures were slightly lower at the end of Wednesday. "I think it's certainly a one-day adjustment, and now any incremental gain we get out of the market we have to earn in the economy," said Ablin, adding the market had feared the impact of automatic spending cuts had Congress not acted.

"Now we get the debt fight, and we get the sequestration battle again at the end of February," said Ablin

Greg Peters, global head of cross asset strategies, said the next battle in Congress is likely be more stressful for markets and cause more volatility. "I think there's a good chance that today's going to be the best day of the year by far," in terms of performance, he said.

"There's a lot of looming problems and potential pitfalls," he said. "The bigger issue is the debt ceiling, and I think it's going to be super contentious. I think Republicans are disgruntled. I think Democrats are disgruntled. It seems like it's really setting up for a vicious, vicious battle."

What to Watch

Chain stores and auto makers will provide a look into the activity of consumersin December, when they release monthly sales Thursday.

There is also jobs-related data, including ADP's private sector payroll report at 8:15 a.m. ET and weekly jobless claims report, released at 8:30 a.m. The ADP report is expected to show 140,000 new jobs in December, and claims are expected to be about 360,000. Later in the day, the Fed releases the minutes of its last meeting at 2 p.m.

"It's clear to us that the motor vehicle industry, like housing is on the road to recovery and that'll be a positive," LaVorgna said. Economists expect to see vehicle sales in December at an annualized sales rate of more than 15 million vehicles.

Thursday's data follows a string of better-than-expected reports, including Wednesday's ISM manufacturing report which was slightly better than expected at 50.7 and last week's durable goods orders, up a bigger-than-expected three percent.

Thomson Reuters expects the chain stores it tracks to show a 1.7 percent sales increase in December, or 3.3 percent if the 5.2 percent decline in drug store sales is not included. It expects discount stores to do the best, with a 3.6 percent gain.Costco is estimated to have a 6.5 percent gain, and department store chainMacy's, a four percent gain.

Ablin said he thinks consumer discretionary stocks have had their run and are now vulnerable, particularly with the two percent increase in payroll taxes. "They're now at a 50 percent premium to their peers. I just don't think consumers are going to have the fire power to support them. They could sell off," he said.

Congress, in the cliff legislation, raised dividend tax rates to 20 percent, from 15 percent for only the highest earners - individuals earning above $400,000 and couples, above $450,000. There had been concerns that dividends would be taxed as regular income, at much higher rates, and many dividend related stocks had sold off in late 2012.

Ablin said he now sees value in telecom, a steady dividend paying sector. "Telecom enjoys a five to six percent dividend yield. It's pretty safe when it comes to new regulation," he said. "I think you keep your head down, clip a nice dividend and leave it alone, and they're cheap. Telecom shares are 10 to 15 percent cheaper, relative to their peers, and they have favorable momentum. They're positioned to do well, and they've gotten investor attention."